(IDEX Online) – There is no question that wealthy shoppers are back in the jewelry market. Roughly 42 percent – or nearly $56 million – of Harry Winston’s second fiscal quarter (ended July 2011) revenues of $133 million came from a few high-value transactions, which we would guess were in the $1 million to $5 million range each.

 

As a result of these uber-high average tickets, Harry Winston’s total reported sales nearly doubled – up 98.5 percent – from the second fiscal quarter a year ago.

 

But let us dissect what actually happened in the second (July) quarter in Harry Winston’s retail division:

 

 

If the high-value transactions are eliminated, and sales are reported in constant dollars (which eliminates the benefit or detriment of currency translation), Harry Winston’s underlying core sales volume was up by just 6 percent in the quarter.

 

To be fair, the high-value sales actually happened, so this is not a slight-of-the-hand sales report. But we are interested in what happened with the rest of Harry Winston’s customer base. The answer: they were there, but they did not step up their spending notably.

 

If we sift through the August quarter numbers, we would focus on the company’s total sales gains in constant dollars: +81 percent. That is a “home run” number by any definition.

 

Profits Soar

Even though all those high-value sales were made at a very low margin – Harry Winston reported that its gross margin fell to 37.8 percent of sales from last year’s 53.1 percent – the retail division’s pretax income rose to nearly $4.7 million, five times as great as last year’s $939,000. That is dramatic profit leverage. Jewelers who are obsessed with achieving a keystone margin on every transaction should take a lesson from Harry Winston: if you give up a little profit, it can pay big dividends in terms of your bottom line profit.

 

The table below summarizes Harry Winston’s retail division financials for the second fiscal quarter ended July 2011.

Second Quarter Highlights

Here are highlights from Harry Winston’s second fiscal quarter ended July 2011.

 

·        In the U.S., where sales surged by 48 percent over the same quarter a year ago, its eight stores benefited from improved marketing and increased advertising as well as two new product launches – the Lily Cluster jewelry collection and the Midnight watch collection.

 

·        Because of a weakening U.S. dollar, sales to foreign tourists rose in the U.S. stores.

 

·        Harry Winston opened ten new wholesale watch stores during the quarter, which boosted sales. At the end of the quarter, the company had 189 wholesale watch doors throughout the world.

 

Near-Term Growth Prospects Bright

Harry Winston management outlined the company’s near term growth plans.

 

·        The company’s primary focus for new stores will be in Asia, the Middle East and Europe.

 

o       Two new licensed stores will open in Dubai in November.

o       One new licensed store will open in Russia in December.

o       One new owned “branch” store will open in Shanghai by January 2012.

o       A new flagship store will open in Shanghai sometime in the first quarter of 2012.

o       Management said it has “several other” stores openings planned for 2012.

 

·        In the third quarter, the company plans to introduce several new products, including its Ocean Sports collection of watches. This collection will be priced between $15,000 and $25,000 at retail. These watches are positioned as an exclusive “zalium collection.” Zalium is a zirconium alloy patented by Harry Winston that belongs exclusively to the company.

 

Five-Year Growth Plan Outlined

Management outlined Harry Winston’s five-year growth goals.

 

·        The company expects to increase its total store count to 50 units over the next five years. Currently, it operates 19 units.

 

·        Harry Winston expects to have 350 wholesale doors selling its timepieces. Currently, it has 189 wholesale doors.

 

·        Management expects that its sales will grow by 15 percent annually over the next half decade.

 

·        Its gross margin should consistently be in the low-to-mid 50 percent range, though it is not clear if this includes high-value transactions.

 

·        Management’s goal is to boost its operating margin – 4.2 percent of sales last year – to a low-to-mid teen level.

 

·        Longer term, Harry Winston retail management has a goal of $1 billion in sales within seven to nine years, with a minimum gross margin of 55 percent and an operating margin of 16 percent. Last year, by comparison, the company’s sales were $345 million, its gross margin was 47 percent and its operating margin was 4 percent.